The European Commission issues a euro zone report card

A demonstrator with Spain's Indignant movement dressed as a banker burns a euro note during a rally at Puerta del Sol on May 15, 2012 in Madrid, Spain. The European Commission recommended leeway for Spain and its troubled banking sector, but Germany is unlikely to give the nod.

Credit:

Pablo Blazquez Dominguez

BRUSSELS — This time around, it's hard to accuse the European Commission of mincing its words.

Warning that the euro zone risks "financial disintegration," the European Union's head office threw down an economic gauntlet for Germany, France and others on Wednesday, with an in-depth assessment of the economic mess and what governments should be doing about it.

French President François Hollande was told his pro-growth election promises need to be tempered with more spending cuts and unpopular free-market reforms; the Commission urged inflation-averse Germany to let wages rise; Spain was warned to urgently improve its policies on labor, growth and, above all, sort out its tottering banking system.

"In some areas they lack sufficient ambition to address the challenges," the Commission said of the Spanish government. "For some of these areas, the national reform program does not contain any specific plans for addressing the challenges."

In the whac-a-mole world of the euro crisis, Spain has again popped up as threat No. 1 — at least until next month's elections in Greece.

Fears over the fate of debt-laden Spanish banks have sent the euro plunging to its lowest levels since 2010, and pushed yields on the country's 10-year bonds toward the 7 percent level which triggered Greece, Ireland and Portugal to appeal for international bailouts.

Wednesday's European Commission recommendations offered some succor for Spain, giving it the possibility, if EU governments agree, of an extra year, until 2014, to get its budget deficit down to the agreed target of 3 percent — down from last year's 8.9 percent.

Commission President Jose Manuel Barroso also suggested the creation of a European "banking union," so a central EU fund could pump capital into struggling banks, instead of leaving each nation to rescue its own.

The plan needs agreement of the EU's member nations, however, and German Chancellor Angela Merkel remains resolutely opposed to sharing the burden of bank failures.

"The German position on direct recapitalization of banks from the European rescue fund is known,” deadpanned Merkel's spokesman Steffen Seibert, in Berlin.

Barroso's idea therefore offers little immediate relief to the Spanish government as it wrestles with a response to a plea for a 19 billion euro bailout from Bankia, its third-largest bank in terms of assets.

Notoriously unwilling to challenge the bigger EU governments, the gravity of the economic crisis has spurred the EU's executive body to become more assertive in its dealings with Berlin, Paris and the rest. The Commission is already at odds with Merkel over calls for "euro bonds" that would share out national debt burdens across the euro zone.

Hollande is supportive on euro bonds, but he's sure to be irked by the Commission's warning that France needs more austerity and policies that weaken cherished job security in order to cut the deficit and make its economy more competitive in international markets.

"We will meet our targets ... and we will do it while implementing the policies François Hollande was elected for," French Finance Minister Pierre Moscovici said in response to the Commission's contention that, "France's track record when it comes to meeting its budgetary targets is mixed."

The EU's economic assessment did offer some glimmers of better news. Germany and Bulgaria were taken off the EU's high-deficit black list; new budget measures in Hungary mean the EU is freeing up blocked aid; Italy's reform efforts were cautiously praised; hard-hit Portugal is starting to see exports rise.

Overall, however, the outlook is grim and the Commission acknowledges that even such tentative signs could be snuffed out if the situation across the euro zone worsens. A banking meltdown in Madrid, or Greece reneging on debt-reduction commitments after its June 17 election could both fatally weaken the euro zone, with disastrous economic consequences across Europe and beyond.

Europeans' perceptions of the crisis, however, remain as divided as their governments' policies. A poll released Tuesday showed 80 percent of Germans believe their leaders have handled the crisis well. That compared to just 32 percent of Greeks.

According to the poll from the Washington-based Pew Research Center, 73 percent of German's think their economy is on the right course. In Italy and Spain, the figure is 6 percent and in Greece 2 percent.

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